As Commercial Real Estate Turns Corner Banks Compete For Loans
Legacy CRE loan portfolios for some of the largest national and regional banks have stabilized and their loan pipelines are growing with a mix of multifamily, REIT, conduit, investment real estate and owner-occupied deals. Bank executives also told investors this past week that some have begun to actively pursue construction and office property loans.
But as it seems with every aspect of this recovery, it’s an uneven mix, largely reflecting what stage of recovery the individual bank’s loan portfolio is in. Some have just cleared up the messes in their portfolios from the Great Recession of 2007; others have already started growing that business – and pretty aggressively too; yet another batch is already starting to pull back as competition for deals has driven down yields and loosened credit standards beyond their comfort zones.
According to bankers, demand for commercial real estate loans is increasing not just for refinancings but also for purchases and development. At the same time, borrowers’ credit quality continued to improve in the third quarter that just ended.
“We’re seeing all cylinders hitting at this particular point,” William Henry Rogers, chairman, CEO and president of SunTrust, noted in his third quarter conference call with analysts. “We’re up 35% since the end of last year, 10.5% this quarter at around $5.5 billion. So I just think you’re going to continue to see good growth in the CRE portfolio, and a lot of that also has to do with the fact that the run-off is effectively over.
“Keep in mind that that 35% growth was against $1.2 billion, $1.3 billion or so in paydowns,” Rogers added. “We’re sort of starting to see that abate, and (then) we’ll see real growth.”
Not surprisingly, multifamily originations continued to be a big driver of CRE loan growth among banks in the third quarter. Astoria Financial, a Lake Success, NY-based bank was just one of many reporting evidence of that. It closed about $1.6 billion of multifamily/CRE loans last year and this week reported it was on target to do that again this year.
“The quality of third quarter multifamily/commercial real estate loan production remained strong, with loan-to-value ratios averaging approximately 42% at origination and debt coverage ratio is averaging approximately 1.76%,” Said Monte Redman, president and CEO of Astoria said. “So, it’s very strong credit.”
However, as many industry observers have been noting lately, multifamily could be peaking soon because the price points have changed, while single-family lending is becoming more attractive. That change opens up the possibility for renewed lending for single-family development and construction, said Kelly S. King, chairman, CEO and president of Branch Banking & Trust Co (BB&T).
“You’ve got a lot of factors going on the CRE market,” King said. “Because of low levels of interest rates, you have a lot of portfolio moving out into conduit markets, so that’s still pretty strong at these all-time low rates. As the economy recovers, you’ll certainly expect to see more CRE activity. For example, though you’ve seen nothing in office and you’ve seen nothing at retail, which is a big part of the market, as the economy gets better, consumer demand goes up, you’ll see those markets recover and that’ll be good for us and everybody else,” King added.
Bankers also made note of the increased flow of international investors coming back into the U.S. market.
Dominic Ng, chairman and CEO of East West Bank, said his bank has been adding “industry expertise” to make sure his bank can support foreign investors in doing deals here, particularly investors and business from China.
“We do a lot of real estate, and Chinese investors are coming to the U.S. and buying a lot of real estate, from hotels to office buildings and then single-family homes and so forth,” Ng said. “And then you look at agriculture, biotech, bioscience, entertainment, film. These are the type of activities that Chinese companies are coming to the U.S. to look into, either in collaboration or as acquisitions.”
Return of Good Times, Brings Return of Competition
While banks appear to have an appetite for increased CRE, they are not necessarily showing an appetite strong enough to take on additional risk at the extraordinarily low prices being offered in the marketplace these days.
“Nobody has ever seen it quite as intense as it is today in that space. It’s just incredible,” BB&T’s King said. “It’s the time to be patient. We think it will turn as we head into the next 12 to 15 months. But for right now, the differentiation between us and the marketplace is simply risk appetite. We’re not going to jump out of the frying pan and into the fire. And we are concerned about some of the strategies that are in place in the marketplace, but we’re going to stay the course.”
Gene Taylor, chairman and CEO of Capital Bank Financial in Coral Gables, FL, noted the same concern.
“In commercial real estate, we are seeing conduit lenders offer premier financing for large projects for limited personal recourse, which is not a transaction structure appropriate for a bank balance sheet in our view,” Taylor said.
“We are confident in our ability to drive strong originations and net portfolio growth remains the company’s top priority. However, while we are going to complete aggressively to originate and retain our loans, we are not going to take on imprudent levels of interest rate or credit risk. I have been in banking for 40 years and I have seen what happens when banks cut corners on quality,” he added.
Source: CoStar Mark Heschmeyer October 23, 2013